Liberalization of Investment and Human Development

21 Pages Posted: 22 Jun 2014

See all articles by Olivier De Schutter

Olivier De Schutter

University of Louvain (Belgium)

Johan F. M. Swinnen

KU Leuven - Centre for Institutions and Economic Performance (LICOS); European Commission, DG II

Jan Wouters

KU Leuven - Leuven Centre for Global Governance Studies

Date Written: June 21, 2012


Particularly throughout the 1990s, one important strategy relied on by countries lacking capital or seeking to improve their access to technology by attracting investors has been to conclude international investment agreements (IIAs). Such treaties usually include provisions relating to the scope and definition of foreign investment ; admission and establishment ; national treatment in the post-establishment phase (a guarantee of non-discrimination against the investor of the other Party established in one Party); the most-favoured nation clause (ensuring that the investor of the other Party will benefit from the same treatment as any other foreign investor) ; fair and equitable treatment, including a protection from expriopriation ; guarantees of free transfers of funds and repatriation of capitals and profits ; and dispute settlement provisions (State-State and State-investor).

But how successful was such a strategy? Did it succeed in attracting investment? And even if it did, how can we assess the 'sovereignty costs', or the loss of 'policy space', associated with the conclusion of IIAs? If countries indeed compete for the arrival of foreign investment and if the conclusion of such agreements is one tool they rely on to gain an advantage on potential competitors, does this entail the risk that the concesssions they make will go too far, for example by renouncing the possibility of imposing performance requirements on the investor (though this could arguably strengthen the linkages with the host economy), by guaranteeing a freeze in the regulatory framework applicable to the investment, or by authorizing transfer pricing between the local subsidiary and the foreign-based parent, thereby reducing the fiscal revenues that could be gained from the arrival of the foreign investor? By concluding an investment agreement, a country signals its intention to respect the rights of investors and to create a legal and policy framework that will provide the kind of stability they usually expect. But could it be that, while it may be understandable for each country considered individually to seek to conclude IIAs with a view to attracting investors, the result is collectively sub-optimal, as the IIAs lose their "signalling" function once they come to be generalized?

We conclude that IIAs are not decisive in attracting investment. FDI inflows are generally dependent on other variables, especially the size of the market in the host country or trade openness ; and although a predictable and safe legal environment does matter to the investor, such predictability can be provided by other means (the more a country's traditional respect for the rule of law is established, the less it shall have to resort to investment treaties that protect the rights of investors). Moreover, if IIAs make any difference, it is especially in the extractive industry where very large investments are made, that are 'sunk' at the early stages of the project, and that are only profitable after a long period of time, leading the investor to be particularly risk-averse.

It would therefore be ill-advised for countries seeking to attract investment to do so by providing incentives in investment agreements, especially where such incentives are designed in a way that could be interpreted as exempting the investor from having to comply with requirements linked to human rights, or to social and environmental considerations. Such incentives are no substitute for the establishment of an attractive macro-economic and business climate, and they may in fact even be counter-productive as regards the immediate aim of attracting investors (let alone as regards the more ambitious aim of human development) if, as a result of entering the country, the investor would be risking its reputation and subject itself to criticism because of the laxity of the standards applied. It is therefore entirely justified, even from the point of view of the attractiveness of a country to investors, to seek to explore which safeguards should be established under the domestic law of host countries in order to ensure that the arrival of FDI shall not negatively affect the rights of the local population, and shall instead contribute positively to human development indicators in the country ; and it is fitting for capital-exporting countries and for agencies such as export credit agencies or multilateral lending institutions to support this effort. Far from limiting the sovereignty of the countries seeking to attract investment, these tools are used in order to strengthen the bargaining position of these countries: they are a way to support them in making the choices that should benefit their populations most, when these countries could otherwise be tempted to 'signal' their willingness to attract investors by providing far-reaching forms of protection that reduce their policy space, or to offer advantages that will annul, or at least seriously diminish, the benefits they have a right to expect from the arrival of FDI.

Keywords: Foreign direct investment, Human Development, International Investment Agreements, Bilateral Investment Agreements, Regulatory competition

Suggested Citation

De Schutter, Olivier and Swinnen, Johan F.M. and Wouters, Jan, Liberalization of Investment and Human Development (June 21, 2012). Available at SSRN: or

Olivier De Schutter (Contact Author)

University of Louvain (Belgium) ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348

Johan F.M. Swinnen

KU Leuven - Centre for Institutions and Economic Performance (LICOS) ( email )

Waaistraat 6
Leuven, B-3000

European Commission, DG II ( email )

Wetstrath 200
Office 15172
1049 Brussels
+32-2-2960442 (Phone)
Not available (Fax)

Jan Wouters

KU Leuven - Leuven Centre for Global Governance Studies ( email )

House De Dorlodot - Deberiotstraat 34
Leuven, B-3000


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